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Was Fuld Unfairly Vilified?

Written By Brian Hicks

Posted December 3, 2008

Some, not all, financial CEOs should be publicly and harshly vilified… not because they’re evil and money-hungry, but because they were dumb enough to leverage their companies by such great extents.

And sure, the Fed should have never allowed these companies to be leveraged by such amounts.  But they weren’t responsible for the lies told by CEOs and in some cases, CFOs that allegedly mislead shareholders into the false belief that all was okay.

Take CEO Richard Fuld and CFO Erin Callan, for example.

As a direct result of the subprime spillover, Fuld, once named “America’s Top Chief Executive” in 2006 by Institutional Investor magazine, watched as Lehman came under fire and suffered unprecedented losses that’d lead to its demise. 

But this was no surprise to us.

We knew Lehman was in trouble. Lehman knew it was in trouble. But foolish investors backed up the boat, as the bank issued one assurance after another. But how could its financial health possibly improve?  

By September 15, Lehman filed for bankruptcy, the largest filing in history and a devastating shock to the financial system.  Fuld became the symbol of failure, the face of the arrogant, money-hungry CEOs that leveraged debt to unsustainable levels. 

Fuld was blamed for betting the house as subprime ballooned, and for refusing to recognize failure on the way down.

You see, by leveraging heavily, revenues could be inflated.  At one point, Lehman borrowed $32 for every $1 it had.  Merrill Lynch and Goldman were leveraged by about 25 to one, for comparison.

Fuld was no victim. 

Though, if you listen to Fuld, he was more of a victim of circumstance, “A victim of his own success,” some Wall Street insiders now suggest… rolling the dice on subprime debt.

“In the end, despite all our efforts, we were overwhelmed, others were overwhelmed, and still other institutions would have been overwhelmed had the government not stepped in to save them. What happened to Lehman Brothers could have happened to any firm on Wall Street, and almost did happen to others. A litany of destabilizing factors: rumors, widening credit default swap spreads, naked short attacks, credit agency downgrades, a loss of confidence by clients and counterparties, and strategic buyers sitting on the sidelines waiting for an assisted deal were not only part of Lehman’s story, but an all too familiar tale for many financial institutions.”

And then there was Callan, a tax lawyer turned CEO.  She became Fuld’s mouthpiece, drawing heat for her bullish stance, despite apparent signs of imminent demise. 

You see, despite Callan sugar-coating, which never reflected the behind-the-scenes desperation, and the 50% decline in stock value, the company was over… done… kaput.  She knew it.  We knew it.  But foolish investors still backed up the boat.

By early June, Lehman announced a $2.8 billion quarterly loss… and the sugar-coating ended as Callan was soon shown the door.

Fuld was no Victim

Days before collapsing, a Lehman subsidiary urged Lehman executes to cut multi-million dollar bonuses to send “a strong message to both employees and investors that management is not shirking accountability for recent performance” to which top Lehman brass responded with:

“Sorry team. I am not sure what’s in the water at Neuberger Berman. I’m embarrassed and I apologize.”

But that’s okay.

They can now explain themselves to federal prosecutors.  Fuld and Callan, along with 10 others, will have to face prosecutors and explain how they didn’t mislead investors into the run-up to bankruptcy.

According to the lawsuit, the Lehman case “represents the worst example of the fraud committed by modern-day robber barons of Wall Street, who targeted public entities to finance their risky practices and then paid themselves hundreds of millions of dollars in compensation while their companies deteriorated.”

But that’s not the worst of it for Fuld.

Fuld, who earned $34.4 million in 2007, is stepping down at the end of 2008. And according to a Harvard Law professor, as mentioned by The New York Observer, says “a departure bonus or a severance package for Mr. Fuld would be illegal under the U.S. bankruptcy law.”

But, hey, if he needs the money he can always sell the home in Greenwich, the $21 million Park Avenue co-op, his home in Vermont, his home in Sun Valley, and the home in Jupiter Island.

Note: Don’t think that Fuld and Callan were the only criminals of our financial chaos.  We’re about to release our full research report on the top people that sank the financial ship.  Stay tuned.